Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 6-10 Indigo Inc, owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another

image text in transcribed
Problem 6-10 Indigo Inc, owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. The company is trying to decide whether to purchase or lease the building and related facilities. Purchase: The company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $1,362,300. An immediate down payment of $417,600 is required, and the remaining $1,444,700 would be paid off over 5 years at $354,700 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $505,700. As the owner of the property, the company will have the following out-of-pocket expenses each period. Property taxes (to be paid at the end of each year) 540,880 Insurance to be paid at the beginning of each year) 26,660 Other (primarily maintenance which occurs at the end of each year) 16.950 584 490 Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Indigo Inc. if Indigo will lease the completed facility for 12 years. The annual costs for the lease would be $249,060. Indigo would have no responsibility related to the facility over the 12 years. The terms of the lease are that Indigo would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $108,700 is required when the store is opened. This deposit will be returned at the end of the 12th year, assuming no unusual damage to the building structure or fixtures. Click here to view.factor tables Compute the present value of lease vs purchase. (Currently, the cost of funds for Indigo Inc. is 9%.) (Round factor values to 5 decimal places, ep. 1.25124 and final answer to o decimal places, e.g. 458,581.) Lease Purchase Present value Which of the two approaches should Indigo Inc. follow? Indigo Inc. should the facilities LINK TO TEXT LINK TO TEXT

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Financial Accounting

Authors: Theodore Christensen, David Cottrell, Cassy Budd

13th Edition

1260772136, 9781260772135

More Books

Students also viewed these Accounting questions

Question

How to Calculate the Correlation Coefficient

Answered: 1 week ago